Hyundai recall sends shares tumbling

The logo of Hyundai Motor Co. is seen on a car displayed at its showroom in Seoul, South Korea, Thursday, July 26, 2018. Hyundai Motor Co. says its net profit for the second quarter has fallen 14 percent over a year earlier due to the South Korean won's strength against the U.S. dollar. (AP Photo/Ahn Young-joon)

INTERNATIONAL – Hyundai Motor third-quarter net profit plunged by a shocking two-thirds, hit by a $440 million (R6.4 billion) one-off charge related to the US recalls and sending its shares tumbling to near nine-year-lows on Thursday.

The unexpected costs relating to Hyundai’s engine recall came on the heels of mounting US pressure to respond to reports of vehicles catching fires.

A recall headache adds to a plethora of issues at Hyundai, which had counted on new SUVs to engineer a recovery following five straight years of annual profit declines stemming from weak sales in its key US and Chinese markets.

Quarterly net profit slid to 269 billion won, the lowest in more than seven years and well below a SmartEstimate of 831 billion won, according to Refinitiv data. SmartEstimates give more weight to recent estimates by analysts who are more consistently accurate.

Shares in the automaker finished down 6 percent, their lowest closing level since March 2010. At one point they fell as much as 12.4 percent, their lowest since January 2010. Shares of affiliate Kia Motors (000270.KS), which will report its earnings on Friday, slumped 5.9 percent.

A US consumer advocate group this month called for an expansion of the engine-related recall, which was announced by the South Korean duo last year, citing a surge in fire complaints.

A US Senate committee asked Hyundai and Kia executives to testify at a hearing next month. A South Korean whistleblower in 2016 reported concerns about engine defects to the US safety regulator, which has subsequently launched a probe into the timeliness of the recalls and whether they covered enough vehicles.

“Transportation authorities in the US and other countries are taking a more rigorous and detailed look at quality matters than in the past,” Lee Hyang, head of Global Quality Strategy Division, said during a conference call with analysts.

The one-off charge will also cover expenses related to new technology aimed at detecting engine defects that will be used in upcoming and some existing models.

“The one-off costs were too big, and the question is whether the costs will be just one-off or whether there will be more to come,” said Jung Yong-jin, an auto analyst at Shinhan Investment & Securities, adding that he did not expect a meaningful earnings recovery in the near term.

Hyundai also said sharp drops in currencies of emerging markets such as Turkey and Russia weighed on its bottom line.

Hyundai said escalating trade wars and slowing growth in China and the US cloud the industry outlook but predicted its profit would rebind in the fourth quarter, helped by new SUVs. It did not elaborate.

Hyundai had been counting on its new Santa Fe SUV to turn around its flagging fortunes in the United States where it had missed out on an SUV boom due to its heavy reliance on sedans.

But its US retail sales rose only 1 percent in the third quarter. Sales in China declined 6 percent, despite an agreement between Seoul and Beijing last year to normalise ties, putting a diplomatic row that had hit sales of South Korean goods behind them.

The automaker said Santa Fe sales should increase gradually.

“The initial response for the Santa Fe is positive,” said Koo Zayong, head of investor relations, adding the model will raise the utilization rate of its US factory to above 90 percent in the fourth quarter from the second quarter's 86 percent.

Hyundai is also bracing for a decision from the United States as to whether it will slap tariffs on imports of vehicles and vehicle parts.

South Korea has argued it should get tariff exemptions, saying it has already made concessions in the auto sector after a bilateral deal was revised last month.